They say it's always darkest before the dawn. If that's true, then it must be getting close to 7 a.m. at Bassett Furniture
Seldom have I read an earnings report more bleak than the one that Bassett released to investors, unannounced, last Friday evening. Rarer still do you find a company reporting news as bad as this, with as tiny a short interest as Bassett attracts, or as large a dividend payout ratio (or for that matter, one more in danger of being cut).
But enough of the foreshadowing. Here's how the bad news broke down: Q4 2006 sales declined 13% year over year, and profits fell even further, down 17%. Full-year sales declined just 2%, while profits fell 44%. The firm operated at a loss both for the quarter and the year, although "other income" and tax benefits helped push it back into the red on a net basis (for both the quarter and the year).
As if the damage to GAAP profitability were not bad enough, the firm's copious free cash flows of yesteryear are no more. Here's how Bassett itself described how it "used cash in its operating activities in 2007": " ... to fund retail segment losses, an increase in accounts receivable, and a reduction in payables and accrued liabilities ... "
In other words: to cover its own losses, and carry its customers' debts, all the while paying its own debts.
And where did Bassett get the scratch for this? "To fund this $5.1 million of operating cash usage, a net $3.9 million in capital spending, and the payment of over $9.4 million in dividend payments to our shareholders, the Company received approximately $6.6 million in dividends from an affiliate, liquidated approximately $6.9 million from its investment portfolio and borrowed approximately $4.4 million under real estate notes payable."
So, because Bassett failed to bring in enough cash to cover its cost of doing business last year, it had to make up the $18.4 million difference by taking out loans, cashing in its investments, and tapping an unidentified third party (perhaps its 99.8%-owned Bassett Industries Alternative Asset Fund) for cash. Although the firm still has a good $56.5 million in net cash on its balance sheet, at this rate of cash burn, that will cover just three more years of such losses.
Finally, in its own defense, Bassett argues that its balance sheet is "strong" because in addition to the net cash, it has "$38 million of accounts receivable [and] $49 million of inventories."
My response: Uncollected bills and unsold goods aren't assets, Bassett. They're liabilities in drag.
How the mighty have fallen. Read where Bassett was once mighty, before entering this sorry state, in "Bassett Is No Dog." Then read where it might be heading in "Bassett Tracks Hooker." (Yes, that's Hooker Furniture
For more on the difficulties in the furniture industry, check out:
Hooker Furniture is a Motley Fool Hidden Gems recommendation.
Fool contributor Rich Smith does not own shares of any company named above.